The fear of deflation serves as the theoretical
justification of every inflationary action taken by the Federal Reserve and
central banks around the world. It is why the Federal Reserve targets a price
inflation rate of 2 percent, and not 0 percent. It is in large part why the
Federal Reserve has more than quadrupled the money supply since August 2008.
And it is, remarkably, a great myth, for there is nothing inherently dangerous
or damaging about deflation.
Deflation is feared not only by the followers of Milton
Friedman (those from the so-called Monetarist or Chicago School of economics),
but by Keynesian economists as well. Leading Keynesian Paul Krugman, in a 2010 New
York Times article titled “Why Deflation is Bad,” cited deflation as the
cause of falling aggregate demand since “when people expect falling prices,
they become less willing to spend, and in particular less willing to borrow.”.......To Read More....
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